FORT LAUDERDALE, FLA. (03/13/2000) - The shares of Wall Street darling and Latin America Internet pioneer StarMedia Network Inc. are on a freefall today after Salomon Smith Barney Inc. downgraded the company from a high-risk buy rating to high-risk neutral, according to a notice posted on the financial firm's home page.
Later, Merrill Lynch & Co. Inc. also downgraded the company, from a buy rating to accumulate, according to a Dow Jones News Service dispatch. Both Merrill Lynch and Salomon Smith Barney said they downgraded StarMedia because they expect the company to have higher-than-expected operating costs, Dow Jones reported.
StarMedia's shares were down US$16.19 in mid-afternoon trading from a close of $50. Earlier in the day, it had been down by $18.
StarMedia, led by its charismatic co-founder, Chairman and Chief Executive Officer Fernando Espuelas, was founded in 1996 and currently operates several Web portals and search engines, including its flagship StarMedia portal (http://www.starmedia.com/).
The company, based in New York City, is credited with igniting the high-pitched enthusiasm for Latin America's nascent Internet market. The company went public in May 1999 and has so far raised over $500 million in investment capital.
StarMedia has done a very good job of generating traffic for its Web sites, and it is one of the leaders in Latin America's Internet market, said Lucas Graves, a senior analyst at Jupiter Communications Inc. in New York.
"I don't think this hit will be the deciding factor over how StarMedia will do three years from now," he said. "The question isn't how its stock does today or this week, but how the company fits into the market it's playing on in the next 12 to 24 months."
StarMedia's challenge is to turn its visitors and its first-mover advantage and leadership into a revenue-generating strategy in the coming years, he added.
In general, because the market is still young, swings like this one are to be expected, Graves said.
"We've thought for a long time that the financial performance of Latin American Internet stocks will see a lot of ups and downs before the market grows into its true potential," he said.
The financial community's enthusiasm over Latin America's Internet market is warranted, considering that the region's growth in Internet use is the fastest in the world. but investors can't overlook the obstacles that affect this market, such as low PC and credit card penetration, he said.
"Real obstacles have to be overcome before Internet usage and online commerce can really thrive in Latin America," Graves said.
StarMedia posted a net loss of $90.7 million, or $1.36 per share, for fiscal year 1999, which ended Dec. 31, 1999, beating the expectations of analysts, which had predicted a loss of $1.74 per share for the year, according to a First Call/Thomson Financial poll. StarMedia's revenue for the year was $20.1 million, most generated from ad sales, compared with revenue of $5.8 million in fiscal 1998.
There were 10.6 million Internet users and $194 million in business-to-consumer online sales in Latin America in 1999, with figures expected to rise to 66.6 million users and $8.3 billion in online sales in 2005, according to Jupiter.
StarMedia, in New York City, can be reached at http://www.starmedia.com/.